Wednesday Report...The Million DOLLAR Question...

Tonight I would like to take a look at the US dollar as its been showing a
little strength lately. Over the last month or two I've been showing some commodities
indexes that have been very weak which I think has to do with the strengthening
US dollar. The move up in the US dollar hasn't been that big yet but it could
be in the beginning stages of a rally phase that could send this index higher.
How high is anyone's guess but any strength will have an impact on the commodities
sector and possibly the precious metals complex. It has been awhile since we
looked at the US dollar so lets take a look under the hood and see what we
can make of the reserve currency.

The first chart I would like to show you is a long term daily chart we were
watching very closely back in May of this year. At the time it looked like
the US dollar was building out a massive H&S top formation. As you can
see the neckline was broken to the downside but quickly reversed direction
and rallied back up above the neckline. At the time I said that was probably
a very bullish development. When you get a false breakout like that and the
price action reverses quickly that is generally a sign of exhaustion. So far
that has been the case.

The daily dollar chart is really quite boring for the short term as there
aren't any good chart patterns to be seen at this time. The longer term daily
chart does show a big horizontal trading range going all the way back to November
of 2013 which corresponds with a similar sideways trading range for gold. It's
not perfect but you can see the inverse movements between the US dollar and
Gold. If you look at the last month of trading for both the US dollar and gold,
on the combo chart below, it's very clear that they are moving in the opposite
direction.

This next chart for the US dollar I've been following for many years that
shows a three year cycle low that comes in like clock work. It's hard to believe
that the next three year cycle low comes in on July 22 of this year. Please
notice the three year cycle low in 2008 and 2011 which coincides pretty close
to important tops in the PM sector and commodities. Are we going to experience
the same thing again three years later from the 2011 cycle bottom? Also the
US dollar is now trading above its 200 dma. It's something I'm keeping a very
close eye on.

If we're going to look at the US dollar we need to take a close look at the
XEU as the euro is the biggest component in a basket of stocks for the dollar.
Unlike the daily chart for the US dollar, that doesn't have a decent short
term daily pattern in play, the euro does. Today it looks like the euro broke
out of a H&S top with a small gap. This could be an important top that
has just formed as I'll show you in a bit as to why.

Below is a very long term chart for the euro that shows two bearish rising
wedges, one inside the other. Notice the last bar on this chart. It's the same
small gap that accompanied our little H&S top on the chart above. Now you
can see why this is such a big deal. If the euro starts to drop precipitously
it will have a positive affect on the US dollar which will have a negative
impact on the commodities complex.

This next chart I've overlaid the euro on top of gold so you can see the similar
correlation. Again it's not perfect by any means but it does give you a sense
that when the euro is strong or weak so is gold. You can do the same thing
with the other important currencies and get a similar result. Again something
I'm keeping a close eye one.

This last chart is a very long term monthly look that shows you just how precarious
the situation is with the euro. I showed you a bearish rising wedge earlier
in this post for the euro that just broke the bottom trendline today with a
gap. This is the same bearish rising wedge only on the monthly look. You can't
see the gap on this chart but the daily chart does show it's now breaking the
bottom trendline. This could be a very big deal.

Below is a very long term chart in which I've overlaid gold on top of the
US dollar. This chart clearly shows you the inverse correlation over the long
haul. It doesn't feel like it but the inverse correlation has been pretty good
since the commodities complex topped out in 2011 along with the US dollar bottoming
about the same time.

Lets take a quick look at copper as it's one of the more important commodities
to help give us direction. As you can see it has been building out a massive
triangle pattern that started to form way back in 2011 when the commodities
complex topped out. As you can see it's testing the top rail which would be
the 7th reversal point if it holds which would make this triangle a reversal
pattern to the downside. On the other hand if it breaks out through the top
rail that would be very bullish for the different economies of the world.

The US dollar is at a critical juncture right here and now. Based on the XEU,
which is just starting to break down, this would imply that the US dollar will
show strength in the coming months. The weakness in the commodities complex
has already shown up which is suggesting deflation is more pronounced than
inflation at this moment. There are areas of strength in the commodities, such
as the industrial metals, which have been doing pretty good, but other areas
like the agricultural side of the commodities complex is doing very poorly.
How will the precious metals complex fair is the million dollar question. Will
they buck the trend and move to the beat of their own drummer? Looking back
in hindsight we will know the answer to that question. Right now we have to
be ever so vigilant looking for clues that may help us understand the answer
to that million dollar question. All the best...Rambus

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